The world’s largest sovereign wealth fund is planning to take on more risk as it seeks to exploit its role as a strategic investor, in a move that could mark a new trend for conservative publicly-owned investment funds.
The Norwegian oil fund, which has more than $600 billion of assets under management, also believes it could be more opportunistic when markets dry up, as was the case during the financial crisis.
“The fund can exploit [its nature as a long-term investor] by being a provider of liquidity in periods when there is a lack of liquidity,” Pål Haugerud, head of asset management in Norway’s finance ministry, said in an interview.
The new approach will be closely watched outside Norway as the size of sovereign wealth funds in the Middle East and Asia, forcing managers to rethink their investments strategies.
Norway’s fund is a long distance bigger than its nearest rival, the Abu Dhabi Investment Authority, which has about $400 billion in assets, according to consultants Roubini Global Economics.
The fund, which received its first money in 1996 and now owns 1 per cent of all global equities, is also looking at favoring shares of smaller companies over larger ones, and undervalued stocks over high-growth ones.
“This fund isn’t an average fund. Perhaps we can do more to increase exposure to various systematic risk premia,” said Mr. Haugerud, who heads a team of 12 officials who decide on asset allocation at the fund.
The fund, known as Norges Bank Investment Management, and the Norwegian government have been reviewing their strategy since coming under heavy criticism domestically for posting big losses in 2008 during the financial crisis.
One suspicion was that the fund was managed too aggressively. But an academic report commissioned by the government concluded that its management had in fact been too passive.
The report recommended the fund look at returns beyond the so-called equity risk premium, the theory that stocks provide an excess return over government bonds over time. The government is now weighing how the fund can exploit a number of these risk factors based on what Mr. Haugerud called its three special characteristics of being “long-term, big, and state-owned”.
Until now, the oil fund has been highly traditional, with 60 per cent of its portfolio invested in shares, 40 per cent in bonds and a fraction in property.
The fund already has rebalancing rules that force it, for instance, to buy equities and sell bonds when share prices have fallen and bond prices risen. “We can maybe look at ways to develop the current, rule-based rebalancing further,” Mr. Haugerud said. He said one project was to look at so-called “time-varying risk premia” – the idea of “buy cheap, sell expensive”.